Strong new orders lift China HSBC flash PMI to 7-month high in October

An employee works inside a steel factory in Caofeidian on the northeastern coast of China's Hebei province, October 11, 2013. REUTERS/China Daily

By Natalie Thomas

BEIJING (Reuters) - Strong new orders drove the fastest expansion in China's manufacturing sector in seven months in October, a preliminary survey showed on Thursday, more evidence that the economy is stabilizing although a strong rebound remains elusive.

"China's growth recovery is becoming consolidated into the fourth quarter following the bottoming out in the third quarter" said Qu Hongbin an HSBC economist in a statement.

"This momentum is likely to continue in the coming months, creating favorable conditions for speeding up structural reforms."

New orders rose to 51.6, the highest in seven months and well above the 50 line separating expansion from contraction.

"From what we can see companies have drawn down inventories now, so once you get a little bit of demand you get orders coming in," said Stephen Green, an economist with Standard Chartered bank.

The strong reading lifted Chinese stocks off two-week lows, although investors are jittery about possible policy tightening by the central bank to put a cap on rising inflation and housing prices. Those fears have seen short-term money rates surge this week.

GROWTH SEEN SLOWING

In the first nine months of the year, the $8.5 trillion economy grew 7.7 percent from a year earlier, putting it on track to achieve Beijing's 2013 target of 7.5 percent, which would be the weakest growth in 23 years.

Still, many economists see growth slowing ahead as global demand remains soft and as Beijing restructures the economy towards one driven more by consumer demand than investment and credit.

"Despite the rise of this flash PMI reading, we believe sequential GDP growth peaked in the third quarter at 2.2 percent and people should expect moderation to a more sustainable growth rate of 1.8-2.0 percent in the fourth quarter," said Ting Lu and economist with Bank of America-Merrill Lynch.

The government has repeatedly stated it will accept slower growth during the restructuring, but policymakers have also shown a willingness to step in to keep growth stable.

The flash PMI showed new export orders ticked up only marginally, suggesting a stabilization in global demand but no solid rebound.

Exports unexpectedly fell 0.3 percent in September, as fears of a tapering in U.S. monetary stimulus weighed on demand from Southeast Asia. Exports were a drag on the economy in the first three quarters, subtracting 1.7 percentage points from growth.

Policymakers stated they would support the trade sector if it looked like missing an 8 percent growth target for this year.

Bank of America's Lu urged caution on attaching too much significance to the flash PMI figures.

"We should keep in mind that the HSBC flash PMI is quite volatile and the final reading could vary significantly from the flash," said Lu.

"The HSBC PMI has a quite small sample size with undisclosed number of missing values."

Last month's final PMI figures delivered a shock to the markets, coming in a full point below the flash reading for September.

The flash PMI is based on 85-90 percent of total responses for each month.